Are nationalized banks the walking dead of the Indian banking system?

Public sector banks, excluding behemoth State Bank of India (SBI), seem to have vanished from the lending scene. The latest data from the Reserve Bank of India (RBI) shows public sector banks didn’t see their loan book grow at all in 2016-17.

SBI, too, had it rough, with its loan book growing just about 4.4%. This is the worst performance by government-owned banks that were otherwise the oil to the engines of growth since India’s massive bank nationalization drive in 1969. It is clear that as bad loans began to pile up around 2012-13, public sector banks applied the brakes on lending. The accompanying chart shows that the slowdown in credit had begun as early as March 2012.

Lenders like IDBI Bank, UCO Bank and Dena Bank are placed under the prompt corrective action framework which would put curbs on their lending in the current fiscal (FY18) by RBI because of unmanageable bad loans and deteriorating capital. Indian Overseas Bank was under similar restrictions in 2015-16.

But a key reason for this dismal loan growth is that as their corporate loan book decayed, public sector lenders were not able to leverage on their retail franchise despite having a large branch network and maintaining their high market share on deposits. Part of this is due to inefficiencies, the inability to lower interest rates due to high credit costs and late entry into digital channels.

In the current fiscal as well as the next, public sector banks are likely to see their market share of loans erode. Another worrying trend is that these banks have not been able to hold on to deposit growth either.

Before demonetization resulted in a deluge of deposits, the growth in deposits at public sector banks was 6.6%. That of SBI’s was 14.10% while private banks mopped up a massive 25% growth. If we leave out demonetization, deposit growth in nationalized banks would be in low single digits.

While market and even investors may have lost faith in public sector banks, it is pertinent to ask whether depositors have also started to doubt the survival ability of these lenders. What stands out is the consistency with which private banks have upped their game.

A new wave mirroring that of the 1969 nationalization could be seen now. The difference is that this one is in the opposite direction, towards privatization.